In accordance with requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) recently conducted five-year assessments of two rules it promulgated under the act. We summarized their assessment of the Ability-to-Repay/Qualified Mortgage rule last week. What follows is a brief summary of the assessment of the Real Estate Settlement Procedures Act's (RESPA's) servicing rule.
Many provisions of the rule relate to servicer obligations to review delinquent borrowers for foreclosure avoidance options such as loss mitigation. These include requiring servicers to make certain disclosures, take certain procedural steps, and meet prescribed timelines when borrowers are applying for and being evaluated for these options.
The data showed that loans becoming delinquent were less likely to proceed to a foreclosure sale during the months after the rule was implemented (January 2014) than before that date. The Bureau estimates that if the rule had not gone into effect in 2014, at least 26,000 additional borrowers who became delinquent that year would have experienced foreclosure within three years.
After controlling for certain observable factors, the assessment found that loans were more likely to recover from delinquency following the Rule's effective date. They estimate that at least 127,000 fewer borrowers would have would have recovered within three years of a 2014 delinquency.
Data from a trade association survey of large mortgage servicers found that the cost of servicing mortgage loans increased substantially between 2008 and 2013, from about $60 per loan per year to about $160 in 2013 and remained between $160 and $180 from 2014 to 2017. The estimated annual cost of servicing a loan in default went from about $480 per loan in 2008 to about $2,410 in 2013 and remained between $2000 and $2,400 from 2014 to 2017.
While most of the increases occurred before the Rule's effective date, between 2009 and 2012 litigation and investor policies imposed many new servicing requirements similar to those in the Rule. Some of the pre-2014 increases could reflect the costs of complying with those earlier requirements.
In interviews servicers said one-time costs of implementing the Rule (including technology and personnel costs) ranged between $1 and $14 per loan. If this range is applied to the approximately 53 million loans under service in 2014, the one-time costs to industry ranged from $53 to $743 million. As previously noted, some servicers had already been subject to similar servicing standards which may have reduced their cost of compliance.
Some servicers said they had significant ongoing compliance costs. Larger servicers estimated that the Rule had increased annual costs by $3 to $11 per loan. For context, industry estimates of average annual servicing costs since 2014 are $250 to $300 per loan. If estimates of on-going servicing costs are applied to the servicing universe it would result in total additional costs of $156 to $572 million. Smaller servicers generally said they were unable to estimate cost impacts of the Rule but that the Rule's requirements were consistent with their practices prior to its existence. Servicers identified as cost drivers the need for more robust control functions and higher personal costs to support increased communication with borrowers.
Asked about the Rule's early intervention provisions, servicer generally said they were consistent with prior practices and did not require substantial changes other than tracking and monitoring compliance. The Bureau did not identify specific costs. There also seemed to be little change in the timing of required borrower notification although the share of borrowers initiating a loss mitigation application within six months of a 60-day delinquency increased from 39 percent in 2012 to 43 percent in 2015.
It did appear that it took borrowers longer post-Rule to go from initiating a loss-mitigation application to completing it. This may be because the Rule required servicers to define a complete application as a more comprehensive package than servicers used pre-Rule. None-the-less, borrowers who submitted complete applications in 2015 did so at a similar stage of delinquency as borrowers in 2012.
Many servicers said the most significant and costly changes they made were to comply with requirement to provide a five-day acknowledgment notice for loss mitigation applications, to evaluate borrowers for all available options at the same time, and provide a decision letter regarding the outcome of those evaluations. These were the requirements that differed most significantly from prior practices.
Both the time from initiation of application to short-sale offer increased post rule, likely due to the additional time required to collect documents necessary for the all-options evaluation. It might also reflect an increase in the length of short-sale marketing periods.
A larger share of borrowers appealed the servicers decision regarding their loss mitigation applications in 2015 than in 2012 but the portion of successful appeals declined.
The provision that prohibited servicers from initiating foreclosure proceedings before the 120th day of delinquency resulted in servicers doing so far less often in 2015 than in 2012. CFPB also found this decrease was not offset by an increase in foreclosure starts within the next several months. This suggests that the Rule prevented rather than delayed foreclosures. Housing counselors interviewed for the assessment said the foreclosure restrictions were the most helpful to their clients of the Rule's requirements.
Servicers in general said they had to make significant changes to comply with these foreclosure restrictions and that they were among the costlier provisions to implement. While agreeing in general with housing counselors, servicers also suggested that the restrictions may have caused some borrowers to delay initiating loss mitigation requests until they had fallen further into delinquency.
Data indicates that a larger share of borrowers who completed loss mitigation application in 2015 were able to avoid foreclosure than those who completed applications in 2012. While loans had been delinquent longer post-Rule before foreclosures were started, it suggests the foreclosure restrictions did not increase the time it took servicers to complete the process.
The Rule's force-placed insurance requirements include a prohibition on charging the borrower until the servicer has provided disclosures and met other requirements. Servicers said these requirements were generally consistent with the forced place policies in place before the Rule, so the effects were small. There was however a moderate decrease in the number of force-placed policies, a trend consistent with the requirements but one that could reflect other explanations such as changes in the insurance market which made it easier or cheaper for borrowers to obtain their own coverage.